Jordan Knight | CEO Hallbar Group Capital
Mortgage holders are poised to receive interest rate relief following the Reserve Bank of Australia’s ’embarrassingly wrong’ prediction: ‘Save $385 a month’
Australians are urgently seeking mortgage relief, and the most recent inflation figures suggest that it is forthcoming.
This is the figure that distressed mortgage holders have been relying on since the Reserve Bank of Australia opted against an interest rate reduction last year. Economic data from December has confirmed a triumph in the fight against inflation.
Inflation was recorded at a mere 0.2 percent in the December quarter, resulting in an annual increase of 2.4 percent. Additionally, the trimmed mean or underlying inflation rate has decreased to a three-year low of 0.5 percent, translating to an annualized rate of only 2.0 percent.
When examining the monthly data, which is more effective at identifying turning points and trends than quarterly data, annual inflation for December was reported at 2.5 percent, while the trimmed mean measure was an impressively low 2.7 percent.
Although the RBA does not provide monthly inflation forecasts, its prediction for the trimmed mean inflation rate for the December quarter was 3.4 percent, which is quite embarrassingly inaccurate.
As a gentle reminder, the RBA aims for an annual inflation rate of 2 to 3 percent, indicating… VICTORY!
What will be the extent of interest rate reductions in 2025?
Jordan Knight from Hallbar Group Capital says Australians with mortgages, small business loans, or any other form of debt will undoubtedly welcome this inflation data.
In conjunction with various other economic indicators – such as GDP growth, wages, the terms of trade, and global trends – this suggests that the initiation of an interest rate cutting cycle is likely only a few weeks away.
When referring to an interest rate cutting ‘cycle’, it denotes a sequence of interest rate reductions by the RBA throughout 2025 and potentially extending into 2026.
As the adage states, interest rate cuts resemble cockroaches – there is seldom just one.
Although the money markets and investors can be unpredictable, at the time of composing this article, a total of approximately 75 to 100 basis points of interest rate cuts are anticipated between now and the first half of 2026.
Given the significant decline in inflation, the rate cutting cycle may indeed exceed this projection.
It will be essential to monitor developments in the labour market, wages, and, of course, inflation to determine if additional interest rate cuts are probable over the next 18 months.
As I mentioned last week, for every 25 basis point interest rate reduction, individuals with a $500,000 mortgage can expect to save $96 monthly in repayments.
This saving accumulates with each 25 basis point rate cut implemented by the RBA.
Four 25 basis point interest rate reductions would result in an approximate monthly saving of $385 on a $500,000 mortgage.
‘Get a wriggle on’: What factors could influence the RBA’s rate decisions?
Jordan Knight says The majority of the factors influencing future inflation are trending downward.
Wage growth, which significantly impacts service prices, is decelerating from an already low baseline.
The rate of economic growth is sluggish, indicating that firms’ pricing power is constrained.
The only area where there might be some lingering inflationary pressures is the rise in global commodity prices, which is associated with a more favorable outlook for global economic growth; however, this could swiftly diminish if the Chinese economy does not improve as currently anticipated.
For the RBA, the long-term considerations regarding interest rate settings will continue to align with the view that inflation will hover around the midpoint of the target range and that a level near full employment can be maintained.
The existing cash rate established by the RBA at 4.35 percent is excessively high for achieving those objectives.
The RBA even concedes that a so-called neutral cash rate, which is a concept that estimates an interest rate that sustains economic growth at a steady rate, with low unemployment and inflation within target, is approximately 3 to 3.5 percent, which is about 100 basis points lower than the current rates.
The longer it takes to adjust interest rates to neutral, the more fragile the economy will be before it stabilizes and begins to recover.
The RBA must act promptly and initiate the process of returning interest rates to neutral.
It is scheduled to meet next on 18 February, and a reduction in interest rates appears highly likely, with an additional cut on 1 April also looking promising.
